UPDATE 2-EU's top court rejects UK challenge to short-selling law

By John O'Donnell and Huw Jones

BRUSSELS/LONDON Jan 22 The European Union's top
court has dismissed Britain's challenge to a law on banning the
short-selling of shares in market emergencies, dealing a blow to
UK attempts to limit the influence of EU rules on the City of
London.

British Prime Minister David Cameron had been seeking to
limit EU controls on London, the bloc's biggest financial
centre, reflecting a broader attempt to renegotiate the
country's membership of the EU ahead of a promised referendum on
staying in the bloc.

But the court's ruling means British regulators would not be
able to opt out of the short-selling law, which gives the
European Securities and Markets Authority (ESMA) power to ban
bets on falling share prices in instances which it sees as a
threat to markets or the stability of the EU financial system.

London has traditionally been less keen on such a ban than
other centres, seeing it as a short-term impediment to market
liquidity which ultimately is the best determinant of a stock's
value.

"The power of the (ESMA) ... to adopt emergency measures ...
in order to regulate or prohibit short-selling is compatible
with EU law," the Luxembourg-based court said in a statement on
Wednesday.

"As all the pleas in law relied on by the United Kingdom
have been rejected, the Court dismisses the action in its
entirety," it said.

Short-selling refers to the sale of borrowed shares in a bet
the price will fall so they can be bought back more cheaply to
turn a profit. It remains controversial because some regulators
believe it can add to stock market weakness at times of crisis
or great volatility.

Britain's finance ministry, which mounted the challenge,
said it was "disappointed" by the ruling and would respond in
full at a later date.

"We've consistently said we want tough financial regulation
that works, but any powers conferred on EU agencies must be
consistent with the EU Treaties and ensure legal certainty," the
UK Treasury said.

Polls suggest Cameron's government faces a drubbing in May's
European Parliament elections by the anti-EU UK Independence
Party (UKIP), whose leader Nigel Farage said: "The institutions
in Brussels despise the City of London and what they see as its
Anglo-Saxon practices.

"We demand that the British government has control over
British industry. This ruling exposes their impotence. The City
is totally at the mercy of the European Commission."

CLOSER TIES

The British Bankers' Association, a lobby group whose
members include Barclays, RBS and Lloyds
, said the UK should build closer ties with the EU and
devote more resources to influencing its financial reforms.

London is home to the London Stock Exchange and is
the EU's biggest share trading centre. Britain has mounted
several challenges to EU rules in a bid to draw a red line on
how much more power over its financial sector can be delegated
to EU supervisors.

Cameron has promised a referendum on UK EU membership in
2017, assuming his Conservative party win an election due in
2015, and the bloc's euro zone countries are forging closer ties
through the creation of a so-called banking union, a move many
in the UK fear will sideline British interests.

"This decision could give the new European Parliament and
the European Commission the green light to confer more powers on
the regulatory supervisors," said Alexandria Carr, a regulatory
lawyer at Mayer Brown.

An advisor to the court had sided with the UK in an opinion
last September, saying the emergency power went beyond what the
watchdog could do under the EU treaty provision used to approve
the law.

But the court ruled that under the short-selling law, the
ESMA's power was "precisely delineated" so it could only go
above the heads of national supervisors if they had taken no
action to deal with disorderly markets.

Lawyers have said that if Britain had won the challenge, it
could have forced the EU to row back on various financial rules
in the pipeline.

Britain is also challenging three other EU rules: A cap on
bankers' bonuses; plans for a financial transaction tax; and the
European Central Bank's attempt to force some clearing houses to
relocate to the euro zone.

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